We find knowledge of the volatility smile implied from foreign exchange options improves foreign exchange volatility forecast accuracy. The literature shows curvature of the smile can be captured by risk‐neutral skewness and risk‐neutral kurtosis and we find inclusion of these variables in forecast models improves volatility forecast accuracy. Further, delta‐neutral hedged portfolio performance highlights the economic significance of incorporating knowledge of the smile in forecast models. Analysis is conducted using options with one month to maturity written on four exchange rate series, GBP/USD, EUR/USD, AUD/USD, and the USD/JPY from 2001 to 2006. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:286–312, 2017